the hartford announces fourth quarter and full year 2018 … · 2019. 10. 3. · bvps (ex. aoci)3,4...

Copyright ©2019 by The Hartford. All rights reserved. No part of this document may be reproduced, published or posted without the permission of The Hartford.

The Hartford Announces Fourth Quarter And Full Year 2018 Financial Results And $1.0 Billion Share Repurchase Authorization; Also Provides 2019 Key Business Metrics Outlook

The Hartford Financial Services Group, Inc.

February 4, 2019


Safe harbor statement

Certain statements made in this presentation should be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These include statements about The Hartford’s future results of operations. We caution investors that these forward-looking statements are not guarantees of future performance, and actual results may differ materially. Investors should consider the important risks and uncertainties that may cause actual results to differ, including those discussed in The Hartford’s news release issued on February 4, 2019, The Hartford’s Quarterly Reports on Form 10-Q, The Hartford’s 2017 Annual Report on Form 10-K, and other filings we make with the U.S. Securities and Exchange Commission. We assume no obligation to update this presentation, which speaks as of today’s date.

The discussion in this presentation of The Hartford’s financial performance includes financial measures that are not derived from generally accepted accounting principles (GAAP). Information regarding these non-GAAP financial measures, including reconciliations to the most directly comparable GAAP financial measures, is provided in the news release issued on February 4, 2019 and The Hartford’s Investor Financial Supplement for fourth quarter 2018 which is available at the Investor Relations section of The Hartford’s website at https://ir.thehartford.com.

From time to time, The Hartford may use its website to disseminate material company information. Financial and other important information regarding The Hartford is routinely accessible through and posted on our website at https://ir.thehartford.com. In addition, you may automatically receive email alerts and other information about The Hartford when you enroll your email address by visiting the “Email Alerts” section at https://ir.thehartford.com.

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▪ 4Q18 core earnings3 of $284 million (down 3% from 4Q17), or $0.78 per diluted share3 (down 4%),

principally due to higher CAY CATs

▪ BVPS (ex. AOCI)3,4 of $39.40 at Dec. 31, 2018, rose 12% from Dec. 31, 2017

4Q18

Financial Results

FY18

Financial Results

2019 Key Business

Metrics Outlook

New Share

Repurchase

Authorization

2019 Catastrophe

Reinsurance

Program

▪ FY185 core earnings rose to $1,575 million (up 55% from FY176), or $4.33 per diluted share (up

58%), with higher Commercial Lines, Group Benefits and Hartford Funds core earnings, including

benefit from lower U.S. corporate tax rate

▪ FY18 core earnings ROE3,7 of 11.6%, up 4.9 points over FY17; up 3.8 points when adjusting average

equity for the full year impact of 2017 charges, including the sale of Talcott Resolution

▪ Outlook for Commercial Lines combined ratio of 94.5% - 96.5%, Personal Lines combined ratio of

97.5% - 99.5%, P&C1CAY CATs2 ratio of 4.2%, and Group Benefits core earnings margin3 of

6.0% - 7.0%

▪ The outlook does not include the impact of the acquisition of The Navigators Group (Navigators),

which is expected to close in late March or April 2019

▪ New share repurchase authorization of $1.0 billion for use through Dec. 31, 2020

▪ Expect to use a portion of this authorization in 2019 but anticipate using the majority of the

program in 2020, based on projected future holding company resources

▪ Slight changes in 2019 catastrophe reinsurance programs include $50 million lower attachment

point on aggregate property catastrophe treaty at $775 million compared with $825 million in 2018

1. Property and Casualty (P&C) 2. Current accident year (CAY) catastrophe losses (CATs) 3. Denotes financial measure not calculated based on generally accepted accounting principles (GAAP) 4.

Book value per diluted share (BVPS), excluding accumulated other comprehensive income (AOCI) 5. Full year 2018 (FY18) 6. Full year 2017 (FY17) 7. Core earnings return on equity (ROE)

Summary

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Copyright ©2019 by The Hartford. All rights reserved. No part of this document may be reproduced, published or posted without the permission of The Hartford.4

2019 Outlook

The Hartford's strategic and financial goals

▪ Strengthen the competitive advantages of our businesses through expanded products, underwriting

expertise, market capabilities and talent

▪ While expanding our product capabilities and risk appetite are key pillars of our strategy, with the

recent Group Benefits acquisition and the future acquisition of Navigators, we have what we need

◦ The near term focus is on successfully integrating the acquisitions and

◦ Maximizing our combined potential, including deepening our distribution relationships and

meeting a broader array of customer needs

Strategic goals:

Financial goals:

▪ Maintain strong margins and top line growth

▪ Sustain core earnings ROEs well above our cost of equity capital; core earnings ROE was 11.6% in FY18

▪ Generate shareholder value creation (SVC1) over the long term by growing BVPS (ex. AOCI) and

dividends

1. Shareholder value creation (SVC) in a period is defined as change in common dividends paid plus ending BVPS (ex. AOCI) divided by beginning of period BVPS (ex AOCI)


2019 Outlook

Key business metrics outlook for 2019

($ in millions)

2018 Actual

2019 Outlook

Commercial Lines combined ratio2,3,4 92.6 94.5 - 96.5

Commercial Lines underlying combined ratio3,5 91.5 91.0 - 93.0

Personal Lines combined ratio2 106.3 97.5 - 99.5

Personal Lines underlying combined ratio5 91.2 91.0 - 93.0

P&C CAY CATs ratio2,3 7.9 4.2

Group Benefits net income margin6,7 5.6% 5.5% - 6.5%

Group Benefits core earnings margin5,7 7.0% 6.0% - 7.0%

1. Limited partnerships and other alternative investments (LP)

2. 2019 outlook includes total P&C CAY CATs ratio of 4.2 points or 3.0 points in Commercial Lines and 6.5 points in Personal Lines; actual catastrophes are likely to be

different and will fluctuate quarterly due to seasonal variations. P&C CAY CATs ratio equates to approximately $435 million, before tax, in 2019

3. Excludes The Navigators Group

4. Commercial Lines 2019 outlook includes 0.5 point of unfavorable PYD from the accretion of discount on workers' compensation loss reserves

5. Denotes financial measure not calculated based on GAAP

6. Group Benefits 2019 net income margin outlook includes integration costs of approximately $35 million, after tax, compared with $37 million, after tax, in 2018

7. Group Benefits 2019 outlook includes amortization of intangibles of $30 million to $35 million, after tax, compared with $47 million, after tax, in 2018. Includes an estimated

6% return on LP compared with 19% in 2018; actual results are likely to be different and will fluctuate quarterly

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▪ The Hartford’s 2019 outlook is for

continued strong margins, including

lower expected CATs

◦ Outlook does not include Navigators

◦ Neither Commercial Lines nor Personal

Lines outlook includes favorable prior

accident year development (PYD)

◦ CAY CATs outlook lower than actual results

in FY17 and FY18 and more consistent with

10-year average

◦ Commercial Lines underlying combined

ratio reflects expected modest pressure on

workers' compensation from reduced

premium rates

◦ Personal Lines underlying combined ratio

reflects strong margins and higher new

business

◦ Group Benefits margins assume LP1

returns of 6% versus a 19% return in FY18


2019 Outlook

The Hartford announces new share repurchase authorization for

$1.0 billion

▪ As a result of our strong financial position and outlook, The Hartford's board of

directors has authorized a $1.0 billion share repurchase program

◦ The program, effective Feb. 6, 2019, is authorized through Dec. 31, 2020

◦ Will be utilized with discretion, based on current and expected holding company resources

◦ Will not be exercised ratably over program authorization as was the practice in several previous

programs

◦ Based on current projections of future holding company resources, expect to use a portion of

this authorization in 2019 but anticipate using the majority of the program in 2020

▪ Total holding company resources were $3.4 billion at Dec. 31, 2018 and decreased to

$2.9 billion at Jan. 31, 2019, due to Jan. 2019 debt maturity and dividend payment

▪ Projected near-term holding company cash uses include $2.2 billion (including

transaction costs) for the purchase of Navigators in late March or April 2019


2019 Outlook

The Hartford's expected 2019 and 2020 holding company resources1

▪ Expected sources of additional holding company resources in FY19 include:

◦ Group Benefits dividends of $250 million - $300 million

◦ Hartford Funds dividends of $100 million - $125 million

◦ Cash tax receipts of $600 million - $700 million, including realization of net operating loss carry

forwards3 and AMT2 credits

FY20 holding company resources expected to increase from FY19, due to P&C

dividends

◦ In addition to dividends from Group Benefits and Hartford Funds in FY20, annual P&C ordinary

net dividends have been $850 million - $900 million historically

◦ FY20 cash tax receipts expected to total $500 million - $600 million3, slightly lower than FY19 due

to AMT credit repayment

• In addition to the acquisition of Navigators and utilization of the share repurchase

authorization, FY19 and FY20 holding company uses are expected to include:

▪ Annual interest expense of $265 million in FY194 and $240 million in FY20, based on assumed

repayment of March 2020 senior note

▪ Annual common and preferred dividends of approximately $460 million before share repurchases

and any change in common stockholder dividend rate

▪ $500 million 5.5% senior note maturity in March 2020

1. Excludes The Navigators Group

2. Alternative minimum tax (AMT)

3. Subject to actual taxable earnings, including impact of catastrophe losses

4. Depends on actual closing of Navigators acquisition


4Q18 Financial Results

4Q18 core earnings of $284 million and core EPS1,2 of $0.78

down slightly from 4Q17 due to higher CATs

▪ Core earnings of $284 million declined

3% from 4Q17 primarily due to a $182

million increase in CAY CATs, partially

offset by higher core earnings

contributions from:

◦ Group Benefits due to the 4Q17

acquisition, better total loss and expense

ratios and high LP income

◦ P&C NII3, up $27 million, before tax, due

to increased invested assets and higher

LP returns

◦ P&C underlying underwriting gain1, up

$27 million, before tax, primarily due to

lower policyholder dividends and better

general liability and commercial auto

margins than in 4Q17

◦ Favorable impact of a lower U.S.

corporate tax rate

Core Earnings By Segment($ in millions, except per share amounts)

4Q17 4Q18 Change4

Commercial Lines $282 $337 20%

Personal Lines (46) (166) NM

P&C Other Operations 4 (15) NM

Property & Casualty Total 240 156 (35)%

Group Benefits 67 136 103%

Hartford Funds 37 38 3%

Sub-total $344 $330 (4)%

Corporate (51) (46) 10%

Core earnings $293 $284 (3)%

Net realized capital gains (losses), before tax5 59 (175) NM

Integration and transaction costs, before tax (17) (12) 29%

Income tax benefit (expense) (893) 93 NM

Loss from discontinued operations, after tax (3,145) — 100%

Net income (loss) available to common stockholders $(3,703) $190 NM

Preferred stock dividends — 6 NM

Loss from discontinued operations, after tax 3,145 — (100)%

Income (loss) from continuing operations, after tax $(558) $196 NM

Income tax expense (benefit) 980 (29) NM

Income before income taxes $422 $167 (60)%

Loss from discontinued operations, after tax (3,145) — 100%


Net income (loss) $(3,703) $196 NM

Core earnings per diluted share6 $0.81 $0.78 (4)%

Income (loss) from continuing operations per diluted share6,7 $(1.56) $0.52 NM

Net income (loss) per diluted share6,8 $(10.37) $0.52 NM

Wtd. avg. diluted shares outstanding9 363.9 364.0 —%

Wtd. avg. common shares outstanding9 357.0 359.1 1%

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1. Denotes financial measure not calculated based on GAAP 2. Earnings per

diluted share (EPS) 3. Net investment income (NII) 4.The Hartford defines

increases or decreases greater than or equal to 200%, or changes from a net

gain to a net loss position, or vice versa, as “NM” or not meaningful 5. Net

realized capital gains (losses), before tax, excluded from core earnings 6.

Includes dilutive potential common shares 7. Per diluted share data is based

upon income (loss) from continuing operations, after tax, available to common

stockholders 8. Per diluted share data is based upon net income (loss) available

to common stockholders 9. in millions



4Q18 key segment financial highlights


P&C NII

Personal Lines

Group Benefits

Commercial

Lines

▪ P&C 4Q18 NII up 10% over 4Q17 due to increased invested assets and a 61% increase in LP income

▪ 4Q18 annualized investment yield, before tax, was 4.0%, up 0.2 point from 4Q17; flat excluding LP1

◦LP yield of 10.7% in 4Q18 was higher than 6.5% in 4Q17

▪ Underwriting gain of $168 million declined $8 million from 4Q17; combined ratio of 90.7 was 0.8 point

higher than in 4Q17 primarily due to higher CAY CATs, partially offset by higher net favorable PYD

▪ Underlying combined ratio of 91.7 improved 1.3 points from 4Q17 due to lower policyholder dividends

and better auto and general liability margins, partially offset by higher property losses

▪ Underwriting loss in 4Q18 was $140 million higher than in 4Q17 primarily due to a $124 million increase in CAY

CATs; combined ratio of 130.3 increased 17.8 points from 4Q17 due to a 16.7 point increase in CAY CATs

▪ Underlying combined ratio of 92.8 improved 0.3 point from 4Q17 due to earned pricing increases in both auto

and homeowners and lower non-catastrophe losses in homeowners, largely offset by a higher total expense

ratio

▪ Core earnings of $136 million, up $69 million from 4Q17 primarily due to the 4Q17 acquisition, better

total loss and expense ratios, total loss ratio of 72.6%, decreased 3.5 points and a lower U.S. corporate

tax rate

▪ Core earnings margin of 8.9%, up 3.7 points over 4Q17

Property &

Casualty

▪ Combined ratio of 104.8 in 4Q18 was 6.4 points higher than in 4Q17 primarily due to a 6.9 point increase

in CAY CATs

▪ Underlying combined ratio of 92.2 improved 1.0 point from 4Q17 with lower underlying combined ratios in

both Commercial Lines and Personal Lines

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▪ Combined ratio of 90.7 in 4Q18, 0.8 point worse than

4Q17 due principally to:◦ CAY CATs ratio up 3.2 points, with 4Q18 CAY CATs of 2.0

points compared with 4Q17 net favorable CAY CATs of 1.2

points, partially offset by

◦ More net favorable PYD, with 3.0 points of net favorable

PYD in 4Q18 versus 2.0 points in 4Q17, including higher

net favorable PYD in workers' compensation

▪ Underlying combined ratio of 91.7 improved 1.3

points from 4Q17 principally due to:◦ Policyholder dividends 1.1 point less than in 4Q17

◦ Better commercial auto and general liability results

◦ Offset in part by higher property losses

▪ Written premium up 4% over 4Q17, with strong new

business and higher Middle Market renewal pricing◦ Standard Commercial1 new business premiums increased

4% from 4Q17 primarily due to: • Small Commercial up 6% due to the Foremost renewal rights

agreement which was effective in 3Q17, partially offset by

lower Maxum new business

• Middle Market up 1%

◦ Standard Commercial renewal written price increases

averaged 1.5%; Small Commercial was 1.1% and Middle

Market was 2.2%

◦ Policy count retention at 83% and 79% in Small

Commercial and Middle Market, respectively, both

consistent with 4Q17

1. Standard Commercial includes Small Commercial and Middle Market

2. Combined ratio includes policyholder dividends ratio

3. Loss adjustment expense

4. Commercial Lines written premiums include immaterial amounts from Other Commercial


Commercial Lines: Underlying combined ratio improved 1.3 points

over 4Q17 mainly due to lower policyholder dividends and

improvements in auto and general liability results

CAY CATs and PYD Expense Ratio CAY Losses and LAE3 Before CATs

Small Commercial Middle Market Specialty Commercial

4Q17 1Q18 2Q18 3Q18 4Q18

Commercial Lines Written Premiums4

($ in millions)

Commercial Lines Combined Ratio2


▪ Combined ratio of 130.3 in 4Q18, a 17.8 point increase

over 4Q17 reflecting:◦ CAY CATs ratio up 16.7 points, with 38.8 points in 4Q18,

primarily from California wildfires, compared with 22.1 points

in 4Q17

◦ Less favorable PYD of 1.5 point, with 1.3 points in net

favorable PYD in 4Q18 compared with 2.8 points in 4Q17,

primarily due to homeowners

▪ Underlying combined ratio improved 0.3 point from

4Q17 to 92.8 primarily due to:◦ 1.9 point improvement in loss ratio due to earned pricing

increases in both auto and homeowners and lower

homeowners fire and water non-weather losses

◦ Largely offset by a 1.5 point increase in the expense ratio due

to increased marketing spending and the impact of lower

earned premium

▪ Written premiums down 8% from 4Q17 principally due

to lower auto premium retention offset in part by higher

new business premiums◦ New business premiums in 4Q18 up 30% from 4Q17 as a

result of increased marketing initiatives

◦ Premium retention ratios were 84% and 90% for auto and

homeowners, respectively; auto down 3 points from 4Q17

and homeowners up 1 point

◦ Renewal written price increases were at 5.2% and 9.1% for

auto and homeowners, respectively; auto down 5.9 points

from 4Q17 and homeowners up 0.1 point

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Personal Lines: Better underlying combined ratio primarily due to

earned pricing increases and lower losses in homeowners largely

offset by a higher expense ratio

Written Premiums($ in millions)

CAY CATs and PYD Expense Ratio CAY Losses and LAE Before CATs

4Q17 1Q18 2Q18 3Q18 4Q18

Personal Lines Combined Ratio

Auto Homeowners


Core Earnings Core Earnings Margin

Premiums Loss Ratio

▪ Core earnings of $136 million, up $69 million from

4Q17 primarily due to the 4Q17 acquisition, better loss

and expense ratios, and a lower U.S. corporate tax rate

▪ 8.9% core earnings margin versus 5.2% in 4Q17

▪ Loss ratio of 72.6% decreased 3.5 points from 4Q17

with improvement in both disability and life◦ Group disability loss ratio of 67.5% decreased 5.4 points from

4Q17 due to continued favorable incidence

◦ Group life loss ratio decreased 1.4 points to 78.8% reflecting

better mortality experience partially offset by the expected

increase in the loss ratio due to the acquisition

▪ 4Q18 expense ratio of 24.1% declined 0.9 point from

4Q17 due to higher premiums to cover fixed costs and

achievement of expense synergies from acquisition in

2018

▪ Fully insured ongoing premiums up 17% from 4Q17

due to the acquisition, strong persistency, and higher

sales during full year 2018 ◦ Fully insured ongoing sales of $61 million declined by $42

million from 4Q17 due to one large case sale in 4Q17

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Group Benefits: Core earnings rose 103% over 4Q17 and

core earnings margin was 8.9% for 4Q18

Core Earnings and Core Earnings Margin*($ in millions)

1. Excludes buyout premiums

* Includes amortization of intangibles, after tax, of $6 million, $13 million, $13

million, $12 million and $9 million in 4Q17, 1Q18, 2Q18, 3Q18 and 4Q18

respectively

Fully Insured Ongoing Premiums1 & Loss Ratio($ in millions)

*


Total AUM3

($ in billions)


Hartford Funds: Core earnings of $38 million up 3% from 4Q17

despite a 9% decline in assets under management (AUM)

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▪ Core earnings of $38 million, up $1 million from

4Q17 due to a lower U.S. corporate tax rate partially

offset by lower fee income due to reduced average

AUM

▪ Total AUM of $104.8 billion decreased 9% from

Dec. 31, 2017 principally due to a decline in market

value and higher redemptions in 4Q18◦ Mutual Fund and ETP1 net outflows of $0.3 billion in 2018

– Mutual Fund net outflows of $1.7 billion were partially

offset by strong exchange-traded products (ETP) net inflows

of $1.4 billion

– Net flows were positive in the first nine months of 2018

▪ Performance remains strong as 53%, 66% and 68%

of funds outperformed peers on a 1-year, 3-year and

5-year basis2, respectively◦ 51% of funds rated 4 or 5 stars by Morningstar as of Dec.

31, 2018

1. Includes Mutual Fund AUM (mutual funds sold through retail, bank trust, registered

investment advisor and 529 plan channels) and ETPs

2. Hartford Funds and ETPs on Morningstar net of fees basis at Dec. 31, 2018

3. Includes Mutual Fund, ETP and Talcott Resolution life and annuity separate account AUM

as of end of period

4. Represents AUM of the Talcott Resolution life and annuity business sold in May 2018 that

are still managed by Hartford Funds

Mutual Fund and ETP Net Flows($ in millions)

4

$117.0 $121.1

$104.8

$(127)



Total net investment income up 16% from 4Q17 due to higher asset

levels, LP income, and reinvestment yield

* Total includes investment expenses of $19, $18, $18, $22 and $19 in

4Q17, 1Q18, 2Q18, 3Q18 and 4Q18 respectively

▪ Total net investment income up 16% over 4Q17◦ Total net investment income, excluding LP1, of $428 million,

before tax and before investment expenses, increased $44

million principally due to higher asset levels in Group Benefits,

driven by the 4Q17 acquisition, and in Corporate from

proceeds from the sale of Talcott Resolution

◦ LP income of $48 million, before tax, was $19 million higher

than 4Q17

▪ Annualized investment yield, before tax, was 4.0%, up

0.2 point from 4Q17 due to higher LP returns and

reinvestment rates◦ LP yield of 11.6% was higher than 7.3% in 4Q17

▪ Annualized investment yield, before tax, excluding LP1,

was 3.7% in 4Q18, flat with 4Q17:◦ Group Benefits annualized investment yield, before tax,

excluding LP1, was 3.9% in 4Q18, up 0.2 point from 3.7%

due to rebalancing of the portfolio since the November 2017

acquisition

◦ P&C annualized investment yield, before tax, excluding LP1,

was 3.7%, flat with 4Q17

▪ Annualized investment yield, after tax, was 3.3% in

4Q18, up from 2.8% in 4Q17 reflecting a lower U.S.

corporate tax rate in 2018 compared with 2017◦ Both P&C and Group Benefits annualized investment yield,

after tax, of 3.3% and 3.4% respectively, were up from 2.8%

in 4Q17, due to a lower U.S. corporate tax rate in FY18

Annualized Investment Yield, Before Tax

Total Net Investment Income($ in millions)

14

Fixed Maturities and Other LP



FY18 Financial Results

FY18 core earnings of $1,575 million rose 55% over FY17

despite the second consecutive year of elevated CAY CATs

▪ Core earnings increased in all segments

except Personal Lines and P&C Other

Operations

▪ Increased core earnings driven by:

◦ Higher P&C underwriting gain due to more

favorable PYD, improved underlying results,

and slightly lower CAY CATs than 2017 which

also experienced significantly higher CATs

– Better underlying results reflecting

improvement in both Commercial Lines and

Personal Lines

– Partially offset by higher expenses

◦ Increased Group Benefits core earnings due to

the 4Q17 acquisition and improved group

disability incidence

◦ Net investment income, before tax, rose 11%

over 2017 principally due to higher asset levels

from the Group Benefits acquisition and the

sale proceeds of Talcott Resolution, as well as

higher LP income

◦ Higher Hartford Funds earnings driven by

higher average daily AUM

◦ A lower U.S. corporate tax rate

Core Earnings By Segment($ in millions, except per share amounts)

FY17 FY18 Change

Commercial Lines $825 $1,245 51%

Personal Lines 13 (28) NM

P&C Other Operations 61 13 (79)%

Property & Casualty Total 899 1,230 37%

Group Benefits 234 427 82%

Hartford Funds 110 151 37%

Sub-total $1,243 $1,808 45%

Corporate (229) (233) (2)%

Core earnings $1,014 $1,575 55%

Net realized capital gains (losses), before tax 160 (118) NM

Integration and transaction costs, before tax (17) (47) (176)%

Loss on extinguishment of debt, before tax — (6) NM

Pension settlement, before tax (750) — 100%


Income (loss) from discontinued operations, after tax (2,869) 322 NM

Net income (loss) available to common stockholders $(3,131) $1,801 NM

Preferred stock dividends — 6 NM

Loss (Income) from discontinued operations, after tax 2,869 (322) NM

Income (loss) from continuing operations, after tax $(262) $1,485 NM

Income tax expense 985 268 (73)%

Income before income taxes $723 $1,753 142%

Income (loss) from discontinued operations, after tax (2,869) 322 NM

Income tax expense (985) (268) 73%

Net income (loss) $(3,131) $1,807 NM

Core earnings per diluted share $2.74 $4.33 58%

Income (loss) from continuing operations per diluted share

$(0.72) $4.06 NM

Net income (loss) per diluted share $(8.61) $4.95 NM

Wtd. avg. diluted shares outstanding 370.5 364.1 (2)%

Wtd. avg. common shares outstanding 363.7 358.4 (1)%

15



FY18 key segment and financial highlights

Core

Earnings

Property &

Casualty

Personal Lines

Group Benefits

Commercial

Lines

• Core EPS of $4.33 rose 58% from $2.74 in FY17 due principally to a 55% increase in core earnings, including

the impact of a lower U.S. corporate tax rate

• Adjusted for the 2Q17 pension settlement charge, FY18 income before income taxes of $1,753 million was

$280 million, or 19%, higher than FY17 due to growth in Commercial Lines, Group Benefits and Hartford Funds

• Core earnings of $1,230 million, up $331 million from FY17 due to better underwriting results, higher net

investment income and a lower U.S. corporate tax rate, despite high CAY CATs in both years

• Underlying combined ratio of 91.5 improved 1.0 point from FY17, with better underlying underwriting results in

both Commercial Lines and Personal Lines

• Higher underwriting gain primarily due to higher net favorable PYD and lower CAY CATs

• Underlying combined ratio of 91.5 improved 0.5 point from FY17 primarily due to margin improvement in general

liability and auto

• Higher underwriting loss due to higher CAY CATs in FY18, partially offset by improved underlying underwriting

results

• Underlying combined ratio of 91.2 improved 1.8 points from FY17 with better loss results in both auto and

homeowners, partially offset by a higher expense ratio mainly from increased marketing spend and the impact of

lower earned premium

• Core earnings of $427 million, up $180 million from FY17 adjusted for a state guaranty fund assessment of

$13 million, after tax, in 1Q17; growth due principally to the 4Q17 acquisition and a lower U.S. corporate tax rate

• Loss ratio of 75.3% improved 0.8 points from FY17 and expense ratio decreased 1.7 points

ROE and BVPS• Core earnings ROE of 11.6% improved 4.9 points compared with 6.7% at Dec. 31, 2017

• BVPS, ex. AOCI of $39.40, increased 12% compared with Dec. 31, 2017

16



The Hartford's FY18 results, except for CATs, were better than or in

line with February 2018 outlook

17

($ in millions)

2018 Outlook

2018 Actual

Key Business Metrics:

Commercial Lines combined ratio1,2 93.0 - 95.5 92.6

Commercial Lines underlying combined ratio 90.0 - 92.5 91.5

Personal Lines combined ratio1 96.0 - 98.0 106.3

Personal Lines underlying combined ratio 90.5 - 92.5 91.2

P&C CAY CATs ratio1 3.6 7.9

P&C net investment income3 $1,125 -$1,175

$1,242

Group Benefits net income4 $275 - $295 $340

Group Benefits core earnings4 $310 - $330 $427

1. 2018 outlook includes total P&C CAY CATs ratio of 3.6 points or 2.6 points in Commercial Lines and 5.6 points in Personal Lines; P&C CAY CATs ratio equates to

approximately $375 million, before tax, in 2018

2. Commercial Lines 2018 outlook includes 0.5 point of unfavorable PYD from the accretion of discount on workers' compensation loss reserves

3. Before tax and 2018 outlook includes an estimated 6% return on LP

4. 2018 outlook net income and core earnings include amortization of intangibles of $45 million to $50 million, after tax, compared to 2018 actual of $47 million, after tax,

and net income also includes integration costs of approximately $35 million, after tax, compared to 2018 actual of $37 million, after tax

▪ Commercial Lines and Personal Lines FY18

combined ratios were both impacted by

higher CAT losses than assumed in

February 2018, outlook

▪ Commercial Lines combined ratio was

better than outlook principally due to

favorable PYD and strong underlying

underwriting results

▪ Excluding CAY CATs, both Commercial

Lines and Personal Lines underlying

combined ratios were within the range of

our February 2018 outlook

▪ P&C net investment income, before tax, was

better, largely due to LP yield of 12.3%

versus 6% outlook

▪ Group Benefits earnings better than outlook,

primarily due to better loss ratios,

particularly in group disability resulting from

continued favorable incidence and recovery

trends, and higher LP income



2018 core earnings ROE rose 4.9 points and BVPS (ex. AOCI)

grew 12% over 2017

Consolidated Core Earnings ROE

Book Value Per Diluted Share (ex. AOCI)

1. Adjustment reduced Dec. 31, 2016 beginning equity by approximately $4.2 billion for loss on discontinued operations of $2.9 billion, pension transfer charge of $488

million and tax charge of $877 million

2. Core earnings ROE is calculated by dividing (a) core earnings for the prior four fiscal quarters by (b) average common stockholders' equity, excluding AOCI for the

year, using a two point average

3. Shareholder value creation (SVC) in a period is defined as change in common dividends paid plus ending BVPS (ex. AOCI) divided by beginning of period BVPS,

(ex AOCI)

Adjusted

▪ 2018 core earnings ROE was 11.6% versus 6.7% as

reported and 7.8% adjusted1 in 2017

◦ 2018 core earnings ROE was well in excess of cost of capital

◦ Improvement over 2017 due to increased core earnings

◦ 2017 ratio was impacted by charges incurred after Dec. 31,

2016, adjusting average equity1 for the full year impact of

charges taken during the year, including the sale of Talcott

Resolution, 2017 core earnings ROE was 7.8%

◦ 2018 core earnings ROE for P&C, Group Benefits and

Hartford Funds were 16.3%, 12.3% and 54.8%, respectively

▪ BVPS of $35.06 at Dec. 31, 2018 declined 6% versus

prior year principally due to the sale of Talcott

Resolution and the negative impact of higher interest

rates and wider credit spreads on net unrealized capital

gains

◦ BVPS (ex. AOCI) of $39.40 at Dec. 31, 2018 rose 12%,

primarily due to net income in excess of stockholder dividends

▪ Including dividends paid, SVC3 of 15% over last 12

months◦ $379 million of common dividends were paid in 2018, up 11%

over 2017


▪ Recent actions:◦ Repaid $500 million junior subordinated debentures in

June 2018

◦ Issued $345 million preferred stock in Nov. 2018

◦ Repaid $413 million debt maturity in Jan. 2019

Total debt to capitalization, excluding AOCI, of

24.2% at Dec. 31, 2018 decreased 3.8 points from

Dec. 31, 2017◦ Pro forma 22.5% with January repayment

◦ Net reduction in senior debt par of $233 million and

junior subordinated debentures par of $500 million

▪ Total debt and preferred stock ratio1 was 25.9% at

Dec. 31, 2018, a 2.1 point decrease from 28.0% at

Dec. 31, 2017◦ Pro forma 24.3% with January repayment

◦ Total leverage ratio currently within target range of

low to mid-twenties

▪ Future actions:◦ Expect to assume 5.75% senior note par of $265 million,

due 2023, upon closing of Navigators acquisition

◦ Expect to repay 5.5% senior note par of $500 million in

March 2020

19

1. Total debt and preferred stock ratio = Total debt, including hybrids, and preferred stock

divided by total capital excluding AOCI

2. Net of issuance costs

3. 2018 pro forma reflects the repayment of the $413 million 6.0% senior note in Jan. 2019

4. The rating agency adjusted leverage calculation reflects adjustments related to The

Hartford’s defined benefit plans' unfunded pension liability and the Company's rental

expense on operating leases for a total adjustment of $0.9 billion and $1.0 billion for

Dec. 31, 2018 and Dec. 31, 2017, respectively. Reflects 25% equity credit for The

Hartford's outstanding junior subordinated debentures and 50% equity credit for The

Hartford’s outstanding preferred stock


Debt decreased and leverage ratio improved since 2017

Total Debt to Capitalization Ratio (ex. AOCI)

12/31/17 12/31/1812/31/18 Pro

Forma

Senior notes $3,416 $3,589 $3,176

Junior subordinated debentures $1,582 $1,089 $1,089

Total Debt $4,998 $4,678 $4,265

Preferred stock2 $0 $334 $334

Common shareholders equity, ex. AOCI $12,831 $14,346 $14,346

Total Capitalization, ex. AOCI $17,829 $19,358 $18,945

Capital Structure($ in millions)

12/31/17 12/31/1812/31/18

Pro Forma

Total debt 28.0% 24.2% 22.5%

Total debt and preferred stock 28.0% 25.9% 24.3%

Rating agency adjusted4 28.8% 29.2% 27.6%

Debt to Capitalization Ratios

Pro Forma3


Appendix


2019 Catastrophe Reinsurance Program

Catastrophe reinsurance program effective Jan. 1, 2019

21

Primary catastrophe treaty reinsurance coverages as of January 1, 2019*: ($ in millions)

Per Occurrence Property Catastrophe Treaty for 1/1/2019 to 12/31/2019 [1]Portion of losses reinsured Portion of losses retained

by The Hartford

Losses of $0 to $350 from one event None 100% retained

Losses of $350 to $500 from one event75% of $150 in excess of

$350 25% co-participation

Losses of $500 to $1.1 billion from one event [2]90% of $600 in excess of


Aggregate Property Catastrophe Treaty for 1/1/2019 to 12/31/2019 [3]

$0 to $775 of aggregate losses None 100% retained

$775 to $1.0 billion of aggregate losses 100% None

Workers' Compensation Catastrophe Treaty for 1/1/2019 to 12/31/2019

Losses of $0 to $100 from one event None 100% retained

Losses of $100 to $450 from one event [4]80% of $350 in excess of


(1)In addition to the Property Occurrence Treaty, for Florida events, The Hartford has purchased the mandatory FHCF reinsurance for the period from 6/1/2018 to 5/30/2019. Retention

and coverage varies by writing company. The writing company with the largest coverage under FHCF is Hartford Insurance Company of the Midwest, with coverage for $84 of per event

losses in excess of a $29 retention.

(2)Portions of this layer of coverage extend beyond the traditional one year term.

(3)The aggregate treaty is not limited to a single event; rather, it is designed to provide reinsurance protection for the aggregate of all events designated as catastrophes by PCS (Property

Claims Services/Verisk) with a $350 limit on any one event.

(4)In addition to the limits shown, the worker's compensation reinsurance includes a non-catastrophe, industrial accident layer, providing coverage for 80% of $30 in per event losses in

excess of a $20 retention.

* The principal property catastrophe reinsurance program and certain other reinsurance programs include a provision to reinstate limits in the event that a catastrophe

loss exhausts limits on one or more layers under the treaties. The per occurrence catastrophe treaty and workers’ compensation catastrophe treaty include provisions to

reinstate limits in the event that a covered loss exhausts limits in one or more layers. The aggregate property catastrophe treaty does not have a reinstatement because

of the nature of the treaty.

▪ 2019 catastrophe reinsurance programs have slight changes from 2018 programs:

◦ The single event per occurrence catastrophe treaty coverage continues to attach at $350 million, but coverage was reduced by

$100 million to $750 million in 2019 (covering event losses up to $1.1 billion) from $850 million in 2018 (covering event losses

up to $1.2 billion)

◦ The aggregate property catastrophe treaty attachment was reduced by $50 million from $825 million in 2018 to $775 million in

2019, but coverage above the aggregate retention increased $25 million from $200 million to $225 million


$800

million


Property catastrophe reinsurance occurrence cover

effective Jan. 1, 2019

22

▪ The Hartford’s “per occurrence” property

catastrophe reinsurance program covers

$652.5 million of losses in excess of $350

million arising from a single catastrophe event

up to $1.1 billion in total losses on a single

event◦ 2018 had coverage up to $1.2 billion, with $100

million of optional limit that could be used on

the company's per occurrence or aggregate

treaty

▪ For example, in a hypothetical single

catastrophe event with $1.1 billion in losses,

The Hartford would retain a total of $447.5

million ($350 million retention plus $97.5 million

co-participation), and would recover $652.5

million from our reinsurers.▪ In a $400 million event, we would retain a total

of $362.5 million ($350 million retention plus

$12.5 million co-participation) and would

recover $37.5 million (75% of $50 million)

▪ All the layers of this treaty allow for one full

reinstatement; this allows coverage for

subsequent events up to two times the limit of

the treaty. As the limit is exhausted, it is

reinstated by paying the original contract

premium

1st Layer

75% of $150 million

in excess of $350 million

The Hartford's

Property Catastrophe Occurrence Cover

25% retention

($37.5 million)

2nd Layer

90% of $300 million


10%

retention

($30

million)

3rd Layer

90% of $300 million


10%

retention

($30

million)

$750 million,

with

$652.5 million

recoverable in

one single

$1.1 billion

event after

retention

$350 million

attachment/retention

$1.1 billion

$500

million

$350

million



2019 aggregate property catastrophe treaty has $50 million lower

attachment point than 2018 program

23

*Property Claims Services/Verisk

▪ The Hartford also has an aggregate property catastrophe treaty for

2019 which provides $225 million of coverage in excess of a $775

million retention on aggregate catastrophe losses◦ The aggregate treaty is not limited to a single event; rather, it is

designed to provide reinsurance protection to The Hartford in a year

that has many small and mid-sized catastrophes occur along with one

or two large events

◦ The treaty attachment was reduced by $50 million from $825 million in

2018 to $775 million in 2019, while the coverage increased from $200

million in 2018 to $225 million in 2019

◦ Similar to most of the coverage under the per occurrence property

catastrophe treaty, this treaty does not have an "hours" limitation for

wind events.

▪ Under the terms of the treaty, all paid losses from PCS*-designated

catastrophes during an accident/calendar year are aggregated, with

a $350 million limit for any one event. Once that total reaches the

$775 million attachment point, The Hartford can cede additional

aggregate losses up to $225 million to the treaty◦ For example: If The Hartford paid $200 million of accident year 2019

catastrophe claims through first half of the year, and two additional

losses of $350 million each occurred in the second half of the year for a

total of $900 million, we would not have any coverage under the per

occurrence program (attachment point of $350 million for any one event

not exceeded), but we would recover $125 million under the aggregate

treaty, plus up to an additional $100 million would remain available for

other catastrophes during the remainder of the treaty year

$225 millionrecoverable

in excess of

$775 million

(0% retention)

$775 millionattachment

/retention

The Hartford's

Property Catastrophe

Aggregate Cover

$775

million

$1.0 billion


▪ 2018 A&E reserve review completed in

4Q18 resulted in unfavorable A&E PYD of

$238 million, before tax

◦ Asbestos unfavorable PYD of $167 million,

before tax, primarily due to:

– Higher than anticipated number and

average settlement value of mesothelioma

claim settlements

– Higher than anticipated defense costs

◦ Environmental unfavorable PYD of $71

million, before tax, primarily due to:

– Increased clean-up costs particularly for

superfund sites

– Higher defense costs resulting from higher

share of liability and more complex

remediations

▪ Total amount of unfavorable A&E PYD was

ceded under the adverse development

cover (ADC) treaty with National Indemnity

Company (NICO), a subsidiary of

Berkshire Hathaway

24

A&E ADC Update

P&C A&E1 reserve strengthening in 4Q18 of $238 million ceded to

reinsurance agreement with National Indemnity Company

U.S. A&E Net Reserves Liability($ in millions)

FY 2016 FY 20173 FY 20183

1 year net 8.3* 8.2 6.4

3 year net 7.6* 7.5* 6.6*

1 year gross 8.5* 9.2 8.6

3 year gross 7.4* 9.0* 9.1*

Asbestos Net and Gross Survival Ratios2

1. Asbestos and Environmental (A&E)

2. Includes claims in P&C ongoing operations; net survival ratio is the quotient of the net carried

reserves divided by the average annual payment amount and is an indication of the number of

years that the net carried reserve would last (i.e., survive) if the future annual claim payments

were consistent with the calculated historical average

3. In 2018 and 2017, the net survival ratio has been affected by the adverse development cover

(ADC) with NICO, reducing the survival ratio as the company paid losses during the period that

will be reimbursed in the future under the ADC

* These survival ratios presented exclude the 2016 payment related to the PPG Industries Inc.

(PPG) settlement of $315 million (or $289 million, net of reinsurance)

FY 2016 FY 2017 FY 2018

Beginning net reserves $2,121 $1,655 $1,452

Paid losses and loss adjustment expenses (518) (204) (198)

Incurred losses and loss adjustment expenses 268 — —

Reclassification of allowance for uncollectible reinsurance

30 1 —

Reclassification of U.K. A&E reserves to liabilities held for sale (sale of business closed in 2017)

(246) — —

Ending net reserves $1,655 $1,452 $1,254


▪ Through the end of 2018, a total of $523 million,

before tax, of A&E unfavorable PYD has been

ceded to the NICO agreement with $977 million,

before tax, of capacity remaining under the ADC◦ $285 million, before tax, ceded in 2017

◦ $238 million, before tax, ceded in 2018

▪ The ADC treaty provides $1.5 billion of coverage for

A&E unfavorable PYD above net carried reserves of

$1.7 billion as of Dec. 31, 2016◦ Under GAAP, unfavorable PYD will be offset by

reinsurance recoveries for GAAP financial reporting until

the cumulative ceded reserve charges are equal to the

ceded premium paid ($650 million)

◦ Any unfavorable A&E PYD above the ceded premium

paid of $650 million will result in a deferred recovery and

an initial decrease to GAAP net income; recoveries will

be collected from NICO only after paid losses exceed

Dec. 31, 2016 carried reserves ($1.7 billion) with the

deferred gain recognized in a future GAAP income

statement in the proportion of cumulative recoveries

collected to ultimate ceded recoveries

◦ At the end of 2018, cumulative ceded PYD charges were

$523 million, before tax. $127 million, before tax, of future

unfavorable A&E PYD, if any, would be offset in the

GAAP income statement by a reinsurance recovery

25

A&E ADC Update

P&C A&E ADC as of Dec. 31, 2018

GAAP reinsurance

recoverable:recovery deferred until

paid losses exceed

A&E net carried reserves

at 12/31/16

$238 million ceded in 2018

$285 million ceded in 2017

Ceded

Premium

Paid for

ADC

($650

million)

ADC

Cover

Limits:

$1.5

billion

Net carried reserves

remaining:

~$1.3 billion

A&E paid losses since

Dec. 31, 2016: $402 million

$127 million remaining

A&E

Reserves

at

12/31/16:

$1.7

billion

Remaining Limits and Retention

After 2018 A&E Study

$850

million

the hartford announces fourth quarter and full year 2018 … · 2019. 10. 3. · bvps (ex. aoci)3,4...

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